From Grandmotherliness to Governance The Evolution of IMF Conditionality

• Author: Harold James
• Position: Professor of Modern History at Princeton University and the author of a number of books, including The International Monetary System Since Bretton Woods

IMF conditionality has evolved steadily over the years. It continues to evolve. Recent developments have produced both a fresh approach and new challenges.

On first sight, there is something unchanging, even eternal, about the dilemmas presented by IMF conditionality. But that appearance is deceptive. During the 1990s, an old debate took a new and highly political turn. There are two elements to the current debate about conditionality, which comprises the policy requirements that the IMF places on its program lending. First, there is a long-standing and inherent difficulty in the implications of lending that is not strictly on market terms-that is, on loans made other than on the basis of trust or specific securities. That debate clearly affects not only the IMF but also lending by any international financial institution. Second, a new element is provided by the dramatic political changes that followed the collapse of communism and their coincidence with a global communications revolution and greatly increased financial interdependence (the bundle of issues popularly known as "globalization").

John Williamson's analysis in the early 1980s appears as apt today as it did then: "The traditional criticisms, which initially stemmed primarily from left-wing elements in borrowing countries, were that the IMF adopts a doctrinaire monetarist approach, that it is insensitive to the individual situations of borrowing countries, that it imposes onerous conditions, that it is ideologically biased in favor of free markets and against socialism, and that it overrides national sovereignty and perpetuates dependency. Until recent years, the IMF did not respond to such criticisms. Its aloofness seems to have aggravated the critics...and misgivings spread even to the U.S. Congress."

Origins

But such problems are not unique to the IMF's operations. They are inherent in any attempt to subject lending to a conditionality. The League of Nations programs for Hungary and Austria in 1922 and 1923, for instance, raised exactly the same issue, and the criticisms of them as excessively harsh and intrusive on national sovereignty precisely prefigure later debates. The external control imposed on politically fragile states emerging out of the postwar breakup of the multinational Hapsburg Empire was so extensive and tough that it constituted a deterrent to embarking on similar programs in other states. Instead, countries attempting to stabilize their currencies in the mid-1920s turned to the less "political" capital markets, with the result that, as a general principle, the League's conditionality was counterproductive. A reaction against the experience of the League made some of the architects of the Bretton Woods system, particularly John Maynard Keynes, desire a more automatic Fund. But the principle of conditionality-Keynes called it in a memorable phrase "being grandmotherly"-soon reasserted itself in the lending of the new institution.

For the IMF, conditionality became an increasingly sensitive issue in the 1960s and, above all, in the 1970s for the following reasons. First, because quotas were not raised in line with the dramatic expansion of world trade (see chart), higher levels of lending in relation to quotas were required, with consequently increased conditionality. Second, the expansion of capital markets, which had been completely unanticipated at the time of the Bretton Woods conference of 1944, offered an alternative source of capital. The result was that conditionality applied only to some debtor countries, and the concept of countries "graduating from" the IMF became increasingly popular. Here, however, the skittishness of markets soon produced some unpleasant surprises. Before the outbreak of the 1982 debt crisis, many finance ministers and bankers had considerable confidence that the IMF was irrelevant to all except the poorest countries. Similar beliefs gripped the markets before the 1997 outbreak of the Asian crisis. Third, conditionality became more complex in order to avoid unintended...